THURSDAY, March 28, 2024
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Marketing value in developing markets

Marketing value in developing markets

Emerging markets offer great opportunities for investors and multinational companies, but there are numerous pitfalls to be aware of

An excellent new book has been published entitled “Opportunities In Emerging Markets: Investing In The Economies Of Tomorrow”. I had the pleasure to work with its author, Gordian Gaeta, at Kingdom Breweries Cambodia, and was honoured when he asked me to contribute a chapter. This book is a practical primer on the pros and cons of investing in frontier markets such as Myanmar, through to developing markets throughout the world. Gaeta has vast experience in this area, and has called on a number of practitioners to add colour and insight.

What follows is the first part of my own section. The second part will appear in another issue of The Nation. If you enjoy reading it as much as I did writing it, I hope you will consider reading the entire book.
On November 9, 1989, the Berlin Wall fell. After decades of isolation, millions of consumers in markets such as Poland, Czechoslovakia (soon to be the Czech and Slovak Republics), Hungary, East Germany and Russia were suddenly thrust onto the world stage, ripe for development by the global multinationals.
I was there to sell soap. Working with Procter & Gamble, arguably the smartest and most successful fast-moving consumer goods company, we developed a formula for a superior liquid detergent and went to sell it in Poland. Given P&G’s propensity for research, we tested the product, pricing, advertising and packaging. Every element of the marketing plan was found, quantitatively, to be superior to anything on the market.
With great fanfare, we launched the product in the Polish market. Initial sell-in was very strong. When we had reached optimum levels of distribution, we started advertising. Sales dropped. We studied every element of the marketing plan and found it to be class A. So we doubled the advertising spending. Sales dropped more. We retested the advertising, which consumers told us they loved. So we doubled the ad spend again. And sales dropped even more. We had discovered a perfect inverse correlation between advertising spending and sales. Why was this happening?
Successful marketing in frontier, developing and emerging markets (FDEs) continues to be a challenge. For the investor, finding a suitable investment, doing due diligence, determining appropriate valuation, and putting into place seasoned management are all necessary, but not sufficient, steps to create positive payback. Selling your investment company’s offering into the market, be it a product or service, be your end purchaser a consumer or a business, is key to strong returns. The best investment will fail if the product does not sell. Luckily, there are patterns we can detect and use to our advantage.
For example, there is the “Pendulum Theory of Emerging Market Product Development.”
If we look at what happened when the Berlin Wall fell, when China and Vietnam opened, when Thailand and other markets in Southeast Asia finally became wealthy enough to develop consumer societies, we see a familiar pattern emerge.
When a market first opens, consumers flock to international products. Long deprived of high-quality goods, consumers stop purchasing everything they grew up with for the new, unfamiliar and, frankly, superior products from multinationals. A closed market, deprived of outside competition, usually doesn’t create strong products, and these local products are often swamped by the superiority from outside the country’s borders. Consumers pay higher prices for vastly improved performance.
At some point, usually one to three years after the market opens, there is a countering of this initial reaction. Consumers start to doubt the higher prices, or whether the superior performance is real or imagined, and begin to retreat back to products of their childhood. “If it was good enough for my parents, it is good enough for me” is often heard. Nationalism begins to creep in. 
As consumers become more savvy, they begin to examine each product (or service) on its merits, and a steady state emerges. Some multinational products continue to be purchased for the superior performance, some local products are purchased for their price and value proposition. This is the pendulum. First, a swing one way, then a swing back, then the pendulum settles somewhere in the middle.
This phenomenon can be seen in many markets. China, when it first started to open in the late 1990s, early 2000s, violently exhibited this. From one day to the next, consumers dropped every locally made TV, VCR, refrigerator, microwave and stereo, and only bought foreign. This lasted about a year before there seemed to be an instant return to domestic products. The steady-state period followed shortly thereafter.
The developing market investor needs to understand this. By definition, he is investing in a local company whose fortunes he hopes will grow as the market matures. But this maturation and opening up to the West will entice the multinational, which will attempt to dominate the market by bringing successful products into the local space. Thus, the developing markets’ emergence is a threat as well as an opportunity.
It is the rare local company that can beat the multinational over the long term. Look at the countries of the former Soviet bloc, and see how many local companies have survived.
The strategy of the local company must be to grow stronger, not to compete with the multinational, but to be able to sell out to them. This becomes the investor’s exit strategy.
While the multinational has superior products, technology, systems and strong cash positions, the local company has its own advantages, things the multinational lacks: local knowledge, distribution and sales, factories, government relations and good local people. These five elements are basic and need not be explained in further detail. But it is important to recognise that each element is a double-edged sword.
The local company, by definition, has local knowledge. But often it has not been updated in many years, and quite often reflects a view of the market that is hopelessly out-of-date, especially in a country that is rapidly growing. The multinational, not having this local knowledge, needs to do exhaustive consumer research, very often uncovering insights that the local company has passed over. 
Distribution and sales methods can often be updated, as can factories. Government relations are often strong, but people change, and regimes fall. Manufacturers who for years grew rich on relationships with, for example, the “cronies” in Myanmar, struggle when a new class of leadership comes into power. Lastly, good local people desert their company in a nanosecond when offered the chance to work and be trained by a multinational.
For the investor putting money into a local company, hoping for an exit strategy to a multinational, the strategy becomes clear. Additional monies need to be spent on consumer understanding, upgrading factories and sales operations, retaining people (through incentive programmes, quite often by offering stock options, which a multinational rarely can do) and especially by continuing to focus on strong government relations.
 
Eric Rosenkranz is chairman and founder of e.three, a strategic advisory helping companies in Southeast Asia develop growth-oriented strategies. He can be reached at [email protected]
 
This is the first part of a two-part article to conclude next weekend.
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